Plantwide Overhead Rate
A plantwide overhead rate is a single predetermined overhead rate that a company uses to allocate all of its manufacturing overhead costs to its products or services. It’s called “plantwide” because it applies to the entire plant’s production activities rather than specific departments or activities.
To calculate the plantwide overhead rate, the company estimates the total manufacturing overhead costs for the upcoming period and the total amount of the allocation base (such as direct labor hours, machine hours, or direct labor costs) for the same period. The estimated total overhead costs are then divided by the estimated total of the allocation base.
Here’s the formula:
Plantwide Overhead Rate = Estimated Total Manufacturing Overhead Costs / Estimated Total Amount of Allocation Base
Using a plantwide overhead rate is simpler than other allocation methods, such as departmental rates or activity-based costing, but it might not be as accurate because it assumes all products or services use overhead resources in the same way. This assumption may not hold true if a company produces a variety of products with different production processes, complexities, or volumes.
Example of a Plantwide Overhead Rate
Let’s imagine a manufacturing company, XYZ Inc., which produces two types of products: widgets and gizmos. They’ve decided to use direct labor hours as the allocation base for their manufacturing overhead costs.
XYZ Inc. estimates that its total manufacturing overhead costs for the upcoming year will be $500,000. They also estimate that they will have a total of 10,000 direct labor hours for the same period.
To calculate the plantwide overhead rate, XYZ Inc. would use the following formula:
Plantwide Overhead Rate = Estimated Total Manufacturing Overhead Costs / Estimated Total Direct Labor Hours
= $500,000 / 10,000 hours
= $50 per direct labor hour
So, for every hour of direct labor used to produce widgets and gizmos, XYZ Inc. will allocate $50 of manufacturing overhead costs.
For example, if producing one widget requires 2 hours of direct labor, the overhead costs allocated to that widget will be 2 hours * $50/hour = $100. If a gizmo requires 3 hours of direct labor, the overhead costs allocated to the gizmo will be 3 hours * $50/hour = $150.
Keep in mind that this is a simplified example. In a real-world scenario, a company may have a complex mix of products with different production requirements, which might lead it to use a more sophisticated overhead allocation method, like departmental rates or activity-based costing.